Annex Bulletin 2011-14                              August 18, 2011

A partially OPEN edition


Happy Birthday, IBM! (IBM to turn 100 on June 16; what's the secret of its success?)

Apple Falls from Tree to Cloud, Then to Earth... with a Thud (Last major holdout joins race to cloud, but falls flat on first attempt)



Updated 8/19/11, 9:20AM HST, adds Down for the Count

Analysis of HP's restructuring and third quarter results

Leo's Roar Scares Investors into Flight

Wall Street turns thumbs down on HP restructuring & acquisition plan

HAIKU, Maui, Aug 18, 2011 - The HP lion roared this afternoon after the market closed today.  The sound sent investors fleeing not just from HP, but from most major IT stocks.  The largest computer company's simultaneous restructuring, earnings and acquisition announcements played right into a strong downdraft of the market giving it the look of utter panic and chaos.  Rumors fanned the flames that burned deep holes into shareholders' pocket by this evening.

The HP stock gyrated wildly during the day with the swings of investor moods.  At one point it was up 8%, then down by as much, settling for a 6% loss in regular day's trading.  But that's when the slide really began.  By the time Leo Apotheker, the CEO, and Cathy Lesjak, the CFO, were done outlining their plans for the future, the shares were down almost another 10%.

Meanwhile, while HP shares declined 6% in the regular trading, the panicked investors sold off stocks of some of its competitors by an even greater amount.  Accenture was down over 10%.  Oracle declined more than 8%.  Even IBM, Google and Apple, the three stellar performers of the IT industry, suffered declines in the 4% to 5% range (see above table).

What set off the investors into a flight of panic?  Three things.  HP admitted it is trying to get out of its PC business.  (Not a bad thing, as IBM had shown seven years ago). It announced its intention to acquire a British software company at a huge price premium.  (Again, not a bad thing, except for the price, considering how far behind IBM HP is in the software arena and the cloud technologies).  And it released its third quarter results after the markets closed today.

The latter was almost a non-event.  They results were slightly disappointing but not really bad overall (see HP 3Q Highlights below).  But the market was already so primed for panic by the time they came out, that even if they had been the best ever, it wouldn't have mattered. 

The final nail in the coffin of Apotheker's restructuring plan was the lowering of its revenue and earnings outlook.  HP said it HP expects full year fiscal 2011 revenue in the range $127.2 billion to $127.6 billion, and non-GAAP diluted EPS of $4.82 to $4.86.  The company also backed off its earlier long-term forecast (for 2014). Ouch.

Summary and Outlook

So the slide that started just over a year ago with the sex scandal that knocked HP's previous CEO off his perch (see Do As I Say Not As I Do, Aug 2010), has now turned into a rout.  The HP shares have not been this low since early 2005, when Carly Fiorina, another debased HP CEO, was fired and replaced by Mark Hurd (see the chart).

The downward turn of HP fortunes is nothing short of extraordinary.  Not that long ago, the stock was the best performing component of the Dow Jones index, not just of the IT industry. Now, investors seem to be scrambling to get rid of their HP holdings.

The HP lion roared today.  And everything and everybody in the Wall Street jungle ran for the hills and went into hiding.  We'll see if tomorrow some brave souls venture out to try some bottom-fishing.

* * *

Third quarter highlights

  • Services revenue grew 4% year over year with a 13.5% operating margin. HP also announced the appointment of John Visentin as the new executive vice president for Enterprise Services reporting to Apotheker.
  • Enterprise Servers, Storage and Networking (ESSN) revenue grew 7% year over year with a 13.0% operating margin. Networking was up 15%, Industry Standard Servers was up 9%, Business Critical Systems was down 9%, and HP Storage was up 8%. 3PAR revenue accelerated, with triple-digit year-over-year growth operationally.
  • HP Software revenue grew 20% year over year with a 19.4% operating margin. HP Software revenue was driven by strong growth in licenses and services of 29% and 30%, respectively.
  • Personal Systems Group (PSG) revenue declined 3% year over year with a 5.9% operating margin. PSG remains the PC market leader in terms of units, revenue and profit share. Commercial Client revenue grew 9% and Consumer Client revenue declined 17%.
  • Imaging and Printing Group (IPG) revenue declined 1% year over year with a 14.7% operating margin. Commercial revenue was down 7% year over year with commercial printer hardware units up 1%. Consumer printer hardware revenue was up 1% year over year on 7% unit growth. IPG continued to drive innovation and momentum with digital presses and web-connected printers.
  • Financial Services revenue grew 22% year over year with a 9.4% operating margin. Financial Services continued to see its strong performance driven by both double-digit growth in lease volume and a healthy improvement in portfolio assets.

Happy bargain hunting

Bob Djurdjevic


HP: Down for the Count

HAIKU, Maui, Aug 19 - HP is down for the count.  Last night, the stock got knocked down by a left-right, jab-plexus-uppercut combination of self-inflicted punches.  And it stayed down today.  It is down 21% as we write this note.  For the week, HP shareholders have lost 28% of their market cap. 

As a result, the largest computer company in the world and an erstwhile Dow Jones highflyer is now worth only about a quarter of IBM, and less than 15% of Apple. 

It brings back memories of a similar debacle IBM suffered in April 2005, when its shares lost about 17% on the heels of a disappointing first quarter earnings release (middle chart). But that's where the similarities end.  IBM's was a short-term problem which the company jumped on and fixed right away.  And the stock bounced back accordingly (IBM Bounces Back, July 2005).

Of course, that was also a short-term bounce.  It took YEARS (three to be exact!) of hard work, solid business results and investor confidence rebuilding for IBM to regain the Wall Street trust and for the stock to finally get its fair market valuation relative to its peers (Big Blue Takes Chill Off Wall Street's Spring, Apr 2008).  So Leo Apotheker and his executive team have a tough road to hoe ahead. 

Not that the patch they have traveled so far was easy.  But it will look easy in hindsight three years from now.  Of course, that's what the executives get paid to do - turn the pain into joy.  And if they don't, well, somebody else will.  Just look at the above table how Dell, for example, HP's major PC competitor, is the only top global IT company whose shares have actually RISEN as a result of the HP debacle.

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Volume XXVI, Annex Bulletin 2011-14
August 18, 2011

Bob Djurdjevic, Editor

(c) Copyright 2011 by Annex Research, Inc. All rights reserved.
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